Stockholders of Miva (formerly FindWhat) sued Miva, alleging that Miva had inflated its stock price by making false public statements. In this ruling, Miva successfully dismisses most of the allegations, substantially narrowing the lawsuit. While Miva would have liked to dismiss the complaint entirely, Miva can still find some solace in the fact that the court clearly was underwhelmed by the overreaching nature of the plaintiffs’ claims.

The Allegations

The court reports the plaintiffs’ allegations at the center of the lawsuit:

two of FindWhat’s main revenue generating distribution partners (Saveli Kossenko and Dmitri l/n/u), who represented 36% of FindWhat’s revenues, were using illegal means to inflate revenues. This included the use of spyware, browser hijacking software, and “non-human traffic.” The use of such illicit methods of creating internet traffic, commonly referred to as “click-fraud,” meant that advertisers were not forwarded legitimate leads of consumers interested in acquiring their products. This resulted in advertisers refusing to place high bids with FindWhat, causing FindWhat’s revenue shortfall to worsen…

Based on this, the plaintiffs introduced eleven public statements to show that Miva was painting a rosier picture than reality, including the following statements:

1) 9/3/03 press release: “Through FindWhat.com, online marketers are able to cost-effectively promote their websites and find highly qualified prospects who have already expressed an interest in their product or service.” The court says that the plaintiffs did not allege that the defendants knew its two distributors were sketchy in September 2003.

2) 9/19/03 press release: “The FindWhat.com Network includes hundreds of distribution partners, such as CNET’s Search.com, Excite, Webcrawler, MetaCrawler, Dogpile, and Microsoft Internet Explorer Autosearch.” The implication is that the defendants had a high quality distribution network when they didn’t. The court soundly rejects this contention, saying:

Stating that the FindWhat network “includes hundreds of distribution partners” and identifying seven of the well-known distribution partners says and implies nothing about the Saveli and Dmitri traffic. The press release did not claim these distribution partners were representative of the others, and made no assertion as to the traffic attributed to any of them.

3) 10/20/03 press release: “FindWhat.com’s services are a source of revenue and relevant keyword-targeted listings for its partners, while providing its managed advertisers with exposure to potential customers across the Internet. As with the Yellow Pages in the offline world, FindWhat.com’s managed advertisers get their message in front of prospects at the exact time they are looking for the advertisers’ products and services. Unlike the Yellow Pages, advertisers only pay for those visitors that “walk” into their virtual stores.” The court says that this quote does not address the quality of FindWhat’s network.

4) 12/10/03 press release: “FindWhat.com operates online marketplaces that connect the consumers and businesses that are most likely to purchase specific goods and services with the advertisers that provide those goods and services….This cost-effective, pay-for-performance model allows Web advertisers to pay only for those prospects which click-through to their sites, and increase their potential for exposure through the millions of advertisements distributed throughout the network per day.” The court says this press release predates Miva’s alleged knowledge of click fraud in its network, which (as alleged by plaintiffs) started June 2004.

5) 3/5/04 10-K: “We expect that our consultants, agents, resellers, distributors, subcontractors, and other business partners will adhere to lawful and ethical business practices. It is important to our company’s reputation that we avoid doing business with companies which violate applicable laws or have reputations which could harm our business. Our policy prohibits engaging agents or other third parties to do indirectly what we as a company should not do under our own policies outlined in this code.…The FindWhat.com Network is dedicated to delivering high-quality keyword ads as a result of an Internet user’s search query. As such, we have written and strictly enforce advertising guidelines to try to ensure high relevancy standards….We are dedicated to delivering high-quality traffic to our advertisers’ websites. We employ an integrated system of numerous automated and human processes that continually monitor traffic quality, often eliminating any charges for low quality traffic proactively from the advertisers’ accounts. We enforce strict guidelines with our Network partners to ensure the quality of traffic on the system….We purchase Internet traffic from our distribution partners. Expressed as a percentage of revenue, Internet traffic purchases from one distribution partner represented over 10% of total revenue for each of fiscal 2003 and 2001 and Internet purchases from two individual distribution partners represented over 10% of total revenue for fiscal 2002….During the years ending December 31, 2003, 2002, and 2001, no advertiser represented more than 10% of the Company’s total revenue. The Company purchases Internet traffic from distribution partners. Expressed as a percentage of revenues for the year ending December 31, 2003, Internet traffic purchases from one distribution partner represented over 10% of total revenue, for the year ending December 31, 2002, Internet traffic purchases from two distribution partners each represented over 10% of total revenue, and in the year ending December 31, 2001, Internet traffic purchases from one distribution partner represented over 10% of total revenue. However, none of these distribution partners represented more than 15% of total revenue during the three-year period ended December 31, 2003.”

Plaintiffs take several swipes at this language, including (a) its 2 distribution partners had acted unethically, (b) the math doesn’t add up when 2 distribution partners were about 1/3 of total revenues, and (c) Miva had failed to strictly enforce its policies against the distribution partners.

The court says that there was no promise that all business partners were ethical, dedication to a high-quality network isn’t inconsistent with having some bad apples in the network, Miva properly disclosed that 2 distributors represented over 10% of revenue, and these statements were mostly protected forward-looking statements tempered with appropriate cautionary statements.

6) 7/6/04 conference call statements about revenue growth. The court says these statements weren’t alleged to be untrue. Also, the plaintiffs alleged that Miva had an obligation to disclose bid deflation, but the court says that this wasn’t required in a between-reporting-period conference call.

7) 11/1/04 conference call: an analyst asked about Miva’s traffic sources, Although the Miva execs gave a garbled and ambiguous response, the court says that both execs’ responses were the equivalent of “no comment.”

8) 12/16/04 Jeffries research report. The court says that statements in that report don’t bind Miva because they were made by an independent analyst.

9) 2/23/05 press release: Miva made some projections for 2005 revenue, which plaintiffs say were tainted by the fact that they included revenue from the questionable distributors. The court says that these projections were protected forward looking statements.

10) 2/23/05 conference call: Miva claimed that it has terminated specific rogue distributors, but plaintiffs introduced evidence that in fact Miva hadn’t terminated those distributors. The court said that this was adequately pled.

11) 3/16/05 10-K. “Plaintiffs allege that statements made in the Form, “[w]e do not rely on ‘spyware’ for any purpose and it is not part of our product offering,” were false and misleading because the two largest distribution partners did in fact rely upon spyware. (¶¶ 89-90.) Additionally, statements made in the Form assuring that FindWhat was implementing screening policies and procedures to minimize fraudulent clicks were allegedly false and misleading because Defendants knew or should have known that the majority of their distribution network relied on click fraud, (¶¶ 91-92); statements made that “none of the traffic purchased from any of these distribution partners represented over 10% of consolidated revenue in 2004” were false and misleading because the percentage of revenue generated by two distribution partners exceeded the threshold without disclosure, (¶¶ 93-94); and statements that distribution partners were taken off line in the fourth quarter of 2004 were untrue. (¶ 96.)” The court said that these were adequately pled.

Implications

All told, the court dismissed the lawsuit for 9 of the 11 statements identified by the plaintiffs, leaving only statements #10 and 11 for further proceedings. As with the other recent Miva click-fraud ruling, Miva would have loved to see the entire lawsuit dismissed, but the lawsuit’s narrowing still represents good news for them.

This lawsuit also illustrates how hard it will be for the plaintiffs to succeed in the “syndication fraud” lawsuit against Yahoo from last year. Although Yahoo used different language, the court’s ruling regarding statements #2 and 3 pertain directly to the gist of the Yahoo plaintiffs’ allegations. That lawsuit is currently on hold while the parties try mediation and settlement discussions, but as part of those discussions I suspect Yahoo will be pointing this opinion out to the plaintiffs.